Sources Of Finance: Internal And External

Question 1

What are internal sources of finance?

Answer 1

Money generated by the business or the current owners

Question 2

What are external sources of finance?

Answer 2

Funded from outside the business

Question 3

Examples of internal sources of finance

Answer 3

• Owners capital
• Retained profit
• Sale of assets
• Improved use of working capital

Question 4

Examples of external sources of finance

Answer 4

• Family and friends
• Banks (loans and overdrafts)
• Peer to peer funding
• Grants
• Crowd funding
• Venture capital

Question 5

Owners capital

Answer 5

• Most small businesses are set up with the owners savings
• They are ‘interest free’ but will be lost if business fails
• Banks will not provide a loan or overdraft unless the owners are sharing the financial risk

Question 6

Retained profits

Answer 6

• Profits are the most important source of long term finance
• This form of finance is good because there are no interest payments to be made
• Less dividend to shareholders

Question 7

Sale of assets

Answer 7

• Selling the assets of the business
• Interest free
• Can’t has the assets again
• Assets can depreciate
• May not sell for a lot

Question 8

Improved use to working capital

Answer 8

• Changing the use of capital to a more appropriate use
• No interest
• May not have enough to meet requirements
• May affect quality

Question 9

Family and friends

Answer 9

• When loans or gifts are given by people known to the owners
• Gifts do not have to be repaid which reduces the costs of the business
• Loans can usually be flexible, with low/ no interest
• Can cause friction with family if something goes wrong

Question 10

Banks: loans

Answer 10

• Loans are when someone borrows a set amount from the bank with a fixed repayment term and interest
• Large amounts can be borrowed
• Repayments are predictable
• Interest must be paid where the business is profitable or not

Question 11

Banks: overdrafts

Answer 11

• Overdrafts are when a business ore arranged with the bank that it can spend more than it has in its account
• Flexible and only used when needed
• Interest payments are usually very high making: very expensive

Question 12

Peer to peer funding

Answer 12

• When other business owners or individuals lend money in return for interest
• Can raise between £5,000-£50,000 with repayment terms from 6 months- 5 years
• Quick access to finance
• Not suitable for very large amount and pay back terms can be fairly short

Question 13

Grants

Answer 13

• Amounts of finance given to business, often in areas of high unemployment
• Does not have to be paid back or interest
• Often not available, and only usually relatively small amounts

Question 14

Crowd funding

Answer 14

• When lots of individuals five small amounts to businesses who are worth while
• Flexible about how “funders” are rewarded e.g discounts, free goods or
  equity
• Risky projects can attract funding
• You may not raise as much as you need

Question 15

Venture capital

Answer 15

• When an organisation provides finance in return for equity
• Large amounts can be raised for projects that are too risky for banks
• Venture capitalists can provide advice, expertise and contacts
• The business loses equity a share of profits goes to venture capitalists
• They also have a say in running the business which can be difficult for entrepreneurs

Question 16

What are angel investors?

Answer 16

Investors who back a business before it has opened its doors, taking a full equity risk
- if it fails, the angel investor will lose everything invested

Question 17

What is collateral?

Answer 17

An asset used as security for a loan, it can be sold by a lender if the borrower fails to pay back a loan

Question 18

What is crowdfunding?

Answer 18

Obtaining external finance from many individuals, small investments, usually through a web- based appeal

Question 19

What is seedcorn capital?

Answer 19

The early stage finance that might come from an angel investor

Question 20

What is share capital?

Answer 20

Business finance that has no guarantee on repayment or of annual income, but gains a share of control of the business and its potential profits

Question 21

Advantage and disadvantage of retained profit

Answer 21

A: no interest, safe way to get finance
D: less dividends to shareholders

Question 22

Advantage and disadvantage of sale of assets

Answer 22

A: no interest
D: can’t use assets again, may not sell for a lot

Question 23

Advantage and disadvantage of crowdfunding

Answer 23

A: many small investors can be gathered in order to provide all the finance necessary
D: may not raise as much as you need

Question 24

Advantage and disadvantage of a loan

Answer 24

A: large amounts can be borrowed, repayments are predictable
D: interest rates must be paid whether the business is profitable or not

Question 25

Advantage and disadvantage of overdraft

Answer 25

A: flexible, only used when needed
D: interest rates are high, expensive

Question 26

Advantage and disadvantage of leasing

Answer 26

A: sensible method of avoiding larger chunks of outflows
D: long term leasing is expensive

Question 27

Advantage and disadvantage of trade credit

Answer 27

A: increased sales, customer loyalty
D: higher prices of raw materials, expensive, only available to those companies that have a good track record

Question 28

Advantage and disadvantage of grants

Answer 28

A: you can receive generous amounts of money, good way to build your organisations visibility and credibility
D: time consuming research, competition is fierce, short term

Question 29

Advantage and disadvantage of venture capital

Answer 29

A: large amounts can be raised for projects that are too risked for banks, venture capitalist can provide advice, expertise and contacts
D: business loses equity- share of profits goes to venture capitalists, they also have a say in the running of the business